By Lefteris Adilinis and Fiona Mullen
The government first introduced wage reform in middle of 2015 but more than a year later it has yet to get it through parliament. In the last plenary session before the summer recess, members of parliament again failed to pass it.
The three-year freeze on pay rises, inflation indexing and hiring comes to an end in January 2017. The government would like to replace it with a formula that ensures that growth in the entire public-sector payroll does not exceed the growth in nominal GDP.
But the deadline is not the reason why Finance Minister Harris Georgiades is so keen on getting the reform through.
“For us it is of strategic importance that we get the payroll bill through… it is not like our budgetary plan for 2017 will be thrown into disarray if we do not get the bill through,” he told the Cyprus Weekly.
Deflation means that even if inflation indexing known as COLA is reintroduced in theory, it will not affect government spending in practice.
Georgiades is confident that the budget will remain close to balance and that it will achieve a primary surplus of around 2%.
“In its absence, the negative repercussions will not come on Day 1 or Year 1 but they will come soon enough if we essentially unleash everything, including hiring, increments, COLA without any legal limit,” he said.
Georgiades mentions that the government did an exercise to see how the new formula would have affected spending in the past.
“If we had this law in position 15 years ago, we would have saved hundreds of millions and probably we would have avoided the derailment of public finances.
“Hirings, pay rises, would have still been offered, but in a manner that would have ensured the sustainability of the payroll and essentially of the public finances.”
This is why he emphasises that limits on the whole payroll, and not just wage increases as such, are important.
“In the past we would fully replace and we would always and permanently add additional numbers.”
Eurostat data show that in 2008 (an election year), government spending on wages and salaries rocketed by 18.8%. Through mainly early retirements the current government has cut the number of public-sector workers to 63,555 in the first quarter of 2016, compared with over 70,000 in 1999.
“That’s why for us it is the number one priority for us to get this bill through.”
The government has recently budgeted 250 additional police and fire officers, as well as 3,000 new professional recruits in the army, replacing 3,500 conscripts. But Georgiades emphasises that these are only partial replacements for a small percentage of retirees and are fully budgeted for.
Investment grade
Cyprus issued a seven-year bond in late July at a yield of 3.8% and was around 2.5 times oversubscribed.
Alluding to suggestions on social media that the debt issue must mean the government finances are in trouble, he said: “It was a move that was planned well in advance and published, so it was well-known that the public debt management for the year included a bond issuance.”
Moreover, the bond issue was done for debt-ma-nagement purposes rather than because of any immediate need.
“This is new debt which will replace old debt, extending maturity and lowering the cost,” explained Georgiades.
“The secondary indirect benefit was the confirmation that it offered that Cyprus is able to continue tapping the markets after the end of the bailout programme.
“Some had doubts. We did not,” he added, noting that the bond issue came shortly after the Brexit vote in the UK.
“Fitch Ratings agency highlighted the fact that this was the lowest-ever rate that the Cyprus Republic secured for any bond issuance.”
However, Cyprus still pays much more for debt than all other eurozone countries except for Greece, as Cyprus remains well below investment grade. Moreover, it can be expected to remain in junk territory as long as the wage reform is not passed and bad loans remain high.
“We know that we can do even better, but in order to get there, to get to even lower-rates, we need further rating upgrades. We should know what needs to be done,” said Georgiades.
Investment grade is not an end in itself but something that, by lowering interest payments, will encourage investment and help liberate spending on other things.
“We have been doing better, even without the investment grade. One can only imagine how much improved the investment outlook of Cyprus will be if it achieves this rating upgrade.
“Even through the narrow lens of the public finances, what a good bonus it will be if we are able to redirect additional funds from interest payments to much better purposes regarding education, health, welfare andinfrastructure development.”
This is why Georgiades calls wage reform the “number one” priority.
“It is not a temporary measure…it is a permanent reform which we want to leave behind and which will ensure that even on a medium- to long-term horizon, the payroll is never again allowed to spiral out of control,” he said.